Too Big to Fail

Leaders throughout society indulge in the criminal hubris of considering their institutions too big to fail in great measure because society indulges them by failing to hold them responsible for their socially pernicious behavior. It’s not just Wall Street billionaires.
The current, endless recessionperhaps not a recession at all but in fact a retrenchment to Third World Status for the worlds last superpowermay eventually come to be recognized as a blessing in disguiseif society draws the appropriate lessons. Already enough is understood about the human complicity in provoking this needless disaster to make studying the causes of the recession (if that is all it turns out to be) essential reading for anyone interested in the future course of American and, indeed, global capitalist society. The greed soaked in the belief that failure was impossible is a moral tale that applies to foreign policy, health care management, and the way we treat our poisoned environment as much as it does to economics.
Can the recession earn its keep by teaching us to do a more socially responsible job of managing all major social institutions and policy structures?
No lesson is more important than the idiocy of too big to fail. While Bushs Treasury Secretary Hank Paulson (the Goldman Sachs fox guarding the nations financial henhouse) may appear, as the result of his bailout of billionaire buddies, the prime example of everything that is wrong with how the revolving door Wall Street-Washington elite runs the country for its private benefit, even he had evidently realized, before the bailouts back at least as far as June 2008 that too big to fail was a dangerous mirage. Indeed, he reportedly stated in a speech in Russia that:
we must improve the tools at our disposal for facilitating the orderly failure of a large, complex financial institution [Andrew Ross Sorkin, Too Big to Fail (New York: Penguin Books, 2009), 178.]
One could debate whether or not he took his own words seriously when the crunch came, shortly thereafter or whether American society is yet remotely close to digesting the import of those words, but the recession is a textbook case for the importance of doing so.
The recession is not, of course, by any means the only such case, as any good Reaganite or member of al Quaida would no doubt be quick to point out: both groups take credit for bringing down the Soviet superpower, an empire of both sufficiently colossal size and imperfections to match AIG or Bear Sterns or Merrill Lynch any day. Too big to fail in the glazed over eyes of Brezhnev, Chernenko, and Andropov, the sudden, pathetic collapse of the communist empire looks all too much like those of the above-mentioned capitalist empires. Historians can argue over the degree to which Reagans wild spending on Star Wars, bin Ladens Afghan crusade, or internal rot deserves the credit for destroying the USSR. The bottom line is the hubris that leads to the belief that one is too big to fail, which brings us back to the future of a certain society that is characterized by $100 million golden parachutes for CEOs judged to have failed; global-scale environmental catastrophes resulting in great measure from intentional avoidance of known preventive measures; health care designed as a lucrative business for the primary purpose of personal profit; and four-trillion-dollar wars to build political empires (to distinguish them from the previously cited hydrocarbon and health care empires).
If big is goodand to both the US and the old USSR it was so defined, then bigger is better. To that must be added just one little wrinkle that may differentiate the modern world from old empire-building projects (Imperial Russia, Rome, Spains colonization of South America, etc.). Today, on top of hubris, one has moral hazard. Too big to fail amounts to the bosses evading responsibility. Presidents who declare war on false pretenses, oil executives who despoil huge chunks of the earth after cost-cutting on blow-out preventers, financial magnates who gamble with other peoples money leveraged to the max, or heath care executives who refuse to give coverage to poor people precisely because they are sick may occasionally lose their jobs but do so without paying. Indeed, they walk away sneering and rich.
Too big to fail now means too big to be held accountable, and that is the Achilles heel of Western civilization.
Paulson was right on target with his 2008 comment, except that really he should have omitted the word financial. All of society needs tools to facilitate the orderly failure of institutions deemed fatally ill. Consider BPor Libya. As for the worlds last superpower, perhaps the process of developing rules for its failure (something of course totally impossible) would educate American society, provoking us all to figure out ways to deleverage our overstretch and strengthen our social collateral before the bills come due.

Dam the River or Steer the Boat?

Both Turkey and Switzerland have discovered that it is hard to teach Washington to steer through the flood of global affairs when its feet are stuck in the mud. What will it take to persuade Washington that it can no longer keep the old world it likes so much?
Ankara’s current efforts to find a compromise to resolve the Washington-Tehran dispute illustrate a broader tendency in U.S. foreign policy: insistence on the maintenance of the current international system with the U.S. on top regardless of cost. What Erdogan is doing today, Swiss Foreign Minister Micheline Calmy-Rey did a couple years ago. Washington’s fundamental approach to the world is to raise high the levies along the global political river regardless of the intensity of its currents.
If global affairs are basically stable, then perhaps it makes sense for Washington to fight harder and harder to resist any compromise. But if the global political system is a complex system of mutually interdependent parts that influence each other, so that all are evolving toward some new, unknown future, then for Washington to deny that reality would constitute digging its own grave.
Can Ankara explain its new foreign policy in a way that alleviates Washington tendencies to interpret any independent thinking as a threat?
If the U.S.-Iran relationship is best viewed as a complex adaptive system, rather than as a simple shoot-out at the OK Corral between good guys and bad guys, then decision-makers must accept that the relationship and the broader context within which it exists are evolving in a complex dance in which everyone influences everyone else. This is not very profound and should come as no shock to any decision-maker. Nevertheless, there is a difference between a frame of mind searching for ways to stand fast and a frame of mind starting from the expectation that everything is changing. Insisting on damming up a river offers one fewer options than literally “going with the flow” but trying to steer. Both Erdogan and Calmy-Rey were trying to help Washington steer, a concept of no use to a man with his feet stuck in the mud.

Building Civil Societies…Not State Predators

The Washington debate over the relative merits of brute force vs. state building is, in practice, vacuous. The real choice is between brute force and society building, an endeavor in which the members of the society must be central…and free to talk back to their foreign friends. The building of a centralized and powerful state structure divorced from society is the birthing of a monster.

The debate in the U.S. about how to resolve social instability in Muslim lands that may lead to terrorist attacks against the West frequently centers on the presumed choice between “state building” and military attacks on those identified as enemies. This raises a host of issues, not the least of which is figuring out whether or not Western victims actually are enemies, but that is another story. Here, I want to focus on the concept of “state building.” Bluntly stated, the above debate is so simplistic that it hardly has any value at all (even though on the surface the existence of a debate between war and state building appears to represent a huge step forward from the utterly brainless idea of blowing up everyone who expresses the slightest desire for independence or equality).

The only way “state building” will in fact represent a meaningful advance in U.S. thinking is if the concept is defined well enough to contribute to functioning societies. To put it differently, arguing about “more” or “less” state-building is vacuous. The distinction of value lies not between state building and military force but between effective steps to stimulate the rise of self-sufficient, stable, effective societies and steps that hinder such a process. Both war and the building of repressive state represent steps backward.

The missed point in most U.S. commentary on state building is the dangerously erroneous assumption that having a state is better than not having one (an assumption particularly unexamined in Washington and one that leads directly to assuming that anyone who has managed to seize power—say, via assassination—is a better person to work with than someone, e.g., Sam Adams, who “just” represents a patriotic movement demanding justice). It may in a given case make sense for Washington to deal with a local leader, but to assume that a Saddam or a Saleh deserves automatic respect while a dissident leader merits nothing more than dismissal would be a potentially costly (though hardly unusual) example of unprofessional behavior on the part of a foreign policy decision maker.

The assumption that a state is automatically better than the absence of a state would have been rejected instantly by a large number, probably a large majority, of the august men who created the U.S.A.: in no uncertain terms they placed rights (of both individuals and the 13 colonies) ahead of state power. Had the New England colonies insisted on giving priority to centralized state power, it is doubtful that a unified country would ever have come into being.

A discussion of “state building,” if not clearly defined, is dangerous because it is all too easy for Westerners to assume that means “a Western-style state” or at least “a centralized state.” There is no consensus in many non-Western societies that such a political system is desirable, not to mention any ability to create or manage it for the good of the population (a point sometimes realized all too clearly in a Washington insistent on obedience).

Without both a social consensus that a centralized state is the goal and the ability to manage it for the good of the people, the infusion of aid may amount to empowering whatever predatory mafia may happen to agree to sell itself to the patron. Washington is not the only patron vulnerable to such errors:

The republics of Dagestan and Ingushetia are flashpoints, and Chechnya, newly pacified after years of war, is again experiencing a spate of terrorist attacks. Moscow’s strategy of buying off corrupt local elites in the region has not purchased stability. Islamist radicals thrive on official corruption, interclan warfare, and the heavy-handedness of the police and security services. [Dmitri Trenin, “Russia Reborn,” Foreign Affairs Nov-Dec 2009, 69.]

A better phrase would be “civil society building.” What pre-modern societies often do need is a hand in improving civil societies that, under the stress of interaction with the modern world, have ceased working. Somali civil society, for example, began to fail in the 1980’s after years of superpower interference succeeded only in substituting a nasty dictatorship for old decentralized, clan-based decision-making processes. Similarly, Afghan society was derailed by decades of superpower interference seeking to design modern centralized state structures from the top down. In neither case were the new state structures, when they existed at all, (e.g., tax collection agencies, health care provision agencies, police) effectively connected to the underlying social building blocks of clans, tribes, ethnicity, and religion.

Even after accepting that the focus should be on civil society rather than central government, a danger still remains. Civil society cannot be “built” from the top down or from the outside in. Yes, a supportive global community can help protect a Somalia or Yemen or Bangladesh or an Afghanistan from external threats, but “society,” by definition, is composed of links among the members (Robert Putnam’s bowlers). Incentives can be offered, but the “bowlers” have to decide on their own to bowl together.

Example of how everything can go wrong include when a strong central state imports modern weapons and then gasses the Kurds or uses helicopters to attack villagers in punishment for participating in traditional religious ceremonies that have been banned by a repressive centralized state (as Yemen’s President Saleh is accused of having done). This video of the aftermath of a U.S./Yemeni regime military attack on a dissident Yemeni movement in December 2009 is not an example of “building civil society.” Since the military structure of state government is easier to build than, say, a health care system, and easier to misuse for private purposes, it moves almost inevitably to center stage when a modern, centralized regime is imposed on a premodern, decentralized society. Creating a powerful state before a powerful national civil society has arisen to prevent centralized state abuses of power is exactly the wrong way to go about creating stable, peaceful societies.

So if the creation of potentially oppressive state structures is a key mistake to be avoided, what might be some ways to do things right?

Sponsor civil society dialogue. Demand that any central government desiring Western support first accept the idea of a national dialogue to be followed up by real steps to address dissident demands. One could imagine, for example, conferences to which all dissident groups would be invited. Of course, a predatory regime will use this occasion to identify dissident spokespeople. Therefore, the West needs to be proactive in making its own contacts with those individuals, raising their international visibility, and warning the regime that their disappearance will be taken very seriously. Washington’s first step regarding Yemen should have been to sit down with the leaders of the Houthi and southern dissident groups, not the provision of arms to the regime. Dissident groups should learn that they have peaceful choices. The same argument of course applies to Hamas. It’s not about approval; it’s about stimulating the marketplace of ideas instead of the marketplace of militias. The U.S. should present itself as the defender of peaceful political participation, not as the defender of pet regimes.

Use international peacekeepers to protect civil society, not the regime. In contrast to the Somali model, where an African peacekeeping force supports the government, station international peacekeeping forces in all regions of the country but with direct links in each region to the regional political structure. The goal of the peacekeepers would be to prevent the military suppression of dissident groups in return for agreement by the dissident groups to refrain from violence, thus both offering incentives to behave peacefully and marginalizing those who refuse. In the Somali case, even the most extreme of the groups, al-Shabab, is composed of various sub-groups. In Afghanistan, the heterogeneous nature of “the Taliban” has been widely reported.

The regime, enamored of its own power and privilege, will of course argue that this would “promote disunity.” Precisely so. In a pre-modern society, disunity is the goal. No consensus exists on the form that unity should take. That is the whole point. Until civil society has achieved consensus, confederacy is wiser than centralization. Moreover, the artificial imposition of unity from the outside will almost always go wrong: from Polk’s misunderstandings of Mexican politics through the Vietnam War escapade to the abysmal ignorance of the neo-cons about the complexities of global Islam, history has shown that Washington does not have the eyesight to perceive the George Washingtons or Abraham Lincolns of traditional societies.

Climbing the Ladder of History

Human history is the story of man’s climb up the ladder of justice. The West now stands on the step of welcoming the Muslim world. The “long war” so glibly threatened by extremists of all stripes will be the penalty for failure to take this step.

Human history is, or at least one must so hope, the story of man’s climb up the ladder of social justice. Skipping a few steps, let us zero in on the history of the U.S. and summarize it in a sentence: if the first step was declaration of self-evident truths (and a bit of a mix-up with the day’s superpower), the second step was the inclusion of black men in the dream, and the third step was the inclusion of all women.

Each step brought the next into focus. Articulation of natural rights of humans led logically to abolition. Welcoming male ex-slaves as citizens and voters led logically to welcoming women. With each step, the emerging society improved. If the Declaration of Independence gave the vision inspiring the first step, then Lincoln’s warning that a house divided cannot survive articulated the vision of the second.

That double vision of self-evident rights exercised within a united house should today inspire us to raise our sights to the necessary fourth step. It is now time for the West to articulate a vision of a global political system that will welcome Muslims.

So difficult was it for American society to conceive of a social structure including black men that a near-suicidal fratricidal war had to be fought to accomplish it. Society matured a bit as the result of that lesson and outright war between men and women proved unnecessary to accomplish the next restructuring. Difficult though it was to carry through the resolution to share power, each invitation, each compromise with those formerly marginalized strengthened and enriched society. Now it is not national society but global society that must be restructured.

The immediate challenge is one that in particular faces the party leading the resistance, Americans, and the challenge is to articulate both the goal of inclusiveness and a practical process of achieving it. This cannot be simple. That slavery made a mockery of the Declaration of Independence today seems obvious beyond any need for comment, but it took American society a full generation of agonizing argument and another century of refinements even to approach racial equality. Again, the logic of a white man granting to his wife the same rights that he had granted to male ex-slaves today also seems obvious, but that step took three more generations.

Can reform of the complex global political system prove any easier? Provision will have to be made for tribes that choose not to modernize and states demanding a reform of what today are highly discriminatory nuclear rules. But start we must if we are to avoid the Long War nightmare evoked by extremists on both sides.

Resolving Conflict With the Muslim World

The Western conflict with the Muslim world can be resolved–not by “victory” for the American empire or its “defeat” but by supporting local solutions and real independence for local societies.

In response to an excellent summary by Stephen Walt of the problem of the Afghan conflict, I wrote the following letter to focus attention on nature of an acceptable solution:

Leave Afghanistan? Absolutely–but leave responsibly.

Thinking of the current Afghan conflict as a complex system—and it certainly is one in every sense of the word—makes your well-reasoned argument for U.S. withdrawal all the stronger…but also offers some guidance to the way in which the U.S. should withdraw.

First, the complexity perspective tells us to look for feedbacks, and one of the most dangerous feedbacks (which you alluded to) is the impact of the U.S. presence on nationalist feeling: the more visible the U.S. military, the more support the Taliban will receive from Afghan nationalists. And one could amplify this point by citing innumerable additional negative feedbacks (e.g., radicalization of society, destruction of infrastructure) resulting from high-tech foreign military activity.

This leads to the second point, concerning the nature (and purpose) of a U.S. withdrawal. The question should not be, “Should the U.S. stay or leave?” The question should be, “How can the U.S. most effectively support the creation of a stable, well-governed, secure society?” Full application of American power to create a lackey state is exactly the wrong way. Rather, behind-the-scenes American support for civil society reforms guided by non-Western societies to create a viable, independent Afghan state should be the goal.

Starting from your analysis of the problem, Washington needs to move toward an Afghan, Muslim, Asian solution. That is the exit strategy for the U.S. and the road to peace for Afghanistan.

This is clearly not the current focus of Washington thinking. We need a concerted, organized project to create a plan by which the U.S. can retreat from the Afghan limelight without once again turning our backs on the long-mistreated Afghan people.

To summarize, I offer three principles for resolving not just the Afghan conflict but all the brushfires along the borders between the “American system” of global rule and the Muslim world:

  1. Muslim socio-political reform should be managed first by locals and second by neighboring non-Western societies;
  2. the method should always give precedence to civil society reform with military action firmly subordinated;
  3. the goal should not be incorporation into the American system but the establishment of an independent society.

Can Americans and their friends rise above the crisis of the moment to think through how we might plan such a solution? Behind the headlines and away from Washington decision-making circles, a huge amount of thought and research has gone into finding the answer in recent years. The knowledge to come up with such a plan is available, if only we can summon the will to create the plan and (of course) implement it.

Conflict of Interest

Something is accelerating even faster than the recession, and that is the burgeoning scandal of how Washington is dealing with it.

Summers:

Lawrence Summers is the man President Obama turns to for insight into the economy, so it’s more than a little disturbing that the very financial institutions the taxpayers are now rescuing—to the tune of nearly $3 trillion—paid Summers almost $8 million last year. Goldman Sachs & Co., a major beneficiary of the government’s largesse, paid him $135,000 for one speech.

Geithner:

Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — 2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have massive losses, and that they’re fine. These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed….Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud.

Froman:

Michael Froman, deputy national security adviser for international economic affairs, worked for Citigroup and received more than $7.4 million from the bank from January of 2008 until he entered the Obama administration this year. This included a $2.25 million year-end bonus handed him this past January, within weeks of his joining the Obama administration.

Citigroup has thus far been the beneficiary of $45 billion in cash and over $300 billion in government guarantees of its bad debts.

Donilon:

Obama’s deputy national security adviser, Thomas E. Donilon, was paid $3.9 million by a Washington law firm whose major clients include Citigroup, Goldman Sachs and the private equity firm Apollo Management.

Stevens:

David Stevens, who has been tapped by Obama to head the Federal Housing Administration, is the president and chief operating officer of Long and Foster Cos., a real estate brokerage firm. From 1999 to 2005, Stevens served as a top executive for Freddie Mac, the federally-backed mortgage lending giant that was bailed out and seized by federal regulators in September.

The economic system (socialism for the rich):

Many people object to any ‘redistribution’ of income through taxes, because that, in their view, is socialist. It penalizes hard work and success, and it stifles the spirit of innovation.

But a great redistribution of wealth has already occurred, in the other direction. From 1980 to 2006 the richest 1% of America nearly tripled their after-tax percentage of our nation’s income, while the bottom 90% has seen their share drop over 20%….the total of all state and local taxes, social security taxes, and excise taxes (gasoline, alcohol, tobacco) consumes 21% of the annual incomes of the poorest half of America. For the richest 1% of Americans, the same taxes consume 7% of their incomes.

Wall St. tricks nonprofit institutions:

Bankers deliberately created financial products with hidden risks to lure public officials who did not understand the investments. The unnecessary level of complexity served to justify excessive profits and fees.

The large number of complex derivatives used to swindle non-profit organizations and municipalities across America by the likes of Merrill Lynch and JPMorgan Chase shows how criminality and fraud have become an integral part of Wall Street business practice.

The chosen “solution”:

To aid the financial industry, the Fed slashed interest rates to nothing, savaging savers and retirees. Unable to further lower rates, the government is now flooding the economy with billions of dollars created from thin air that will inevitably generate future asset bubbles, stoke inflation, and eventually drive down the U.S. dollar.

Militarism & Financial Excess: Two Sides of the Same Coin

A more detailed version of this article has been published by Media With Conscience

All Americans have exploited the rest of the world and the American financial-political elite has exploited all other Americans. We are now “all in this together” suffering the impact of the Reagan Financial Revolution in Irresponsibility and Deregulation which formed the natural foundation for the Neo-Con conspiracy to replace the Cold War with American Empire.

Beyond all discussion of economics still lies the global political system, which can be distinguished from the global economic system but not separated from it. Financial exploitation and political exploitation are two sides of the same coin; the financial games of Wall Street, legalized by their Washington buddies under both Clinton and Bush, are the other side of the coin of the militarization of foreign policy. No reform of the financial system, no replacement of the financial system is likely to work unless the policies of “preventive war” and “security through strength” are replaced with policies designed to enhance the social, economic, political, legal, and military security for the poor people of the world.

The intimate relationship between financial and political exploitation is often overlooked, but not because it is secret. Rather, people think in “boxes,” and these mental boxes are unfortunately more figments of their (lack of) imagination than useful models of reality. Imagining and trying to resolve financial problems and political problems separately is wishful thinking, like dieting without exercising. The key differentiating concept in evaluating international behavior is “exploitation.” That is, the primary question to ask concerning a given act is not whether it concerns finance or politics but whether or not it is primarily exploitative.

The same morality and the same attitude lie at the foundation of Washington’s concern over economic issues such as ensuring the influence of Big Oil over Iraqi oil policy or gaining access to Afghan pipeline routes or facilitating Wall Street export of credit default swap “products” or allowing the IMF to impose harsh penalties on the citizens of poor countries in return for aid and political issues such as keeping a string of offensive military bases in Iraq, forcing Iran to accept Israel domination of the Mideast, and asserting the “right” of the U.S. and Israel to launch preventive wars at will.

Whether the current recession will provoke us all into biting the bullet or trap us in another era of rightwing dictatorship like that provoked by the Great Depression is the challenge we face. While “muddling through” is theoretically a third possibility, it seems unlikely for two highly complex sets of reasons:

  1. the severity and broad base (failed financial system, collapsing house mortgage system, rapidly spreading unemployment; in the U.S. and everywhere else) of the recession;
  2. the severity, durability (seven years after 9/11 nothing has been resolved), and broad base (Iraq, Afghanistan, Pakistan, Somalia, Palestine, Lebanon, Iran, with India, Bangladesh, the Philippines, and Indonesia waiting off-stage) of the Western confrontation with activist Islam.

Biting that bullet would entail emphasizing the bailing out of poor people worldwide at the expense of the current emphasis on bailing out the very individuals and institutions on Wall Street who caused the global recession in the first place. Biting that bullet would probably also entail a degree of income redistribution that would noticeably reduce the living standards of middle class America, a group that has been benefiting from unfair terms of trade (nicely known as “globalization”) with poor countries and from Chinese loans rather than living off its real productivity.

Why would Americans agree to such a sacrifice? Most Americans still (just barely) have relatives who recall sacrifices of the Great Depression/World War II era. Make no mistake about it: this is one single unified period: the GD caused WWII. Imagine Hitler with nukes. Do you really want to live through such an era? If you are not convinced, ask someone who did. If Americans understood the dangers, self-interest alone would more than suffice to convince them to accept sacrificing a measure of luxury in order to avoid the threat of a return to another era of war against rightwing totalitarianism.

Before lightly dismissing the threat and asserting with crossed fingers that the world has learned its lesson, consider how close this threat really is. The severe attacks on Constitutional protections and the separation of powers in the U.S. Federal Government after 9/11 were a canary in the mine of global democracy. The warping of Islam into a extremist creed bragging of cruelty to women and the beheading of men is another warning. Rising signs of fascism in other religious movements (e.g., Zionism in Israel as represented not only by current politics but also by popular attitudes in the military and the Jewish “madrassa” system of religious schools and Hindu-firsters in India) constitute further warnings. The radicalization of Islamic nationalism (e.g., Pashtun, Palestine, Somali, Iranian, Iraqi), albeit a predictable response to the military attack upon it and lack of good options for peaceful participation in politics, is yet another warning. Democracy’s spread in the 1990s is under real threat from global dictatorial tendencies today.

Obama does seem to have made some progress. Whether he is leading or following, the fact is that condemnation of the behavior of Wall St. is now widespread; public recognition of the irresponsibility of the elite is the first step toward reform. Israel’s scandalous level of control over U.S. foreign policy has also, in the last year, become widely recognized and condemned. Third, Obama has promised a military withdrawal from Iraq, albeit in suspiciously caveated terms. Fourth, compromise with the Taliban is now as well an issue under intense scrutiny in the U.S. Fifth, the G8 was transformed into the much more representative G20.

Nevertheless, the signs of stonewalling by the Washington-Wall Street elite predominate. Condemnation of Wall St. has not led to government assertion of control (witness the failure to treat financial CEOs the way GM’s CEO was treated). Despite the new recognition of the Israeli lobby’s influence, Obama has not found the strength to resist it. The Iraqi withdrawal, even on paper is not clearcut, and in any case seems more a transfer of scarce resources to Afghanistan than a rejection of a militarist foreign policy. Consideration of compromise with the Taliban notwithstanding, the Obama Administration still appears not to understand the difference between the global al Qua’ida jihad against the West and the Pashtun nationalist movement that is increasingly under Taliban leadership because no one else is bothering to address Pashtun concerns. Finally, the non-reaction by decisionmakers to the Stiglitz report to the U.N. on how to overcome the recession combined with the failure of the London G20 fully to recognize the terms of that report suggests that the U.S. elite remains unwilling to face up to global financial realities.

Indeed, the long distance the U.S. elite still needs to travel in order to reach reality becomes clear only when it is realized that, despite being the new standard for measuring the performance of mere politicians on the economy, the Stiglitz report with its focus on economics is nevertheless far too narrow to provide the road to success. Stiglitz may, possibly, have provided the way forward for the financial side of the coin (though his efforts to defend the core of the current global financial system would be dismissed as unrealistic by many thinkers), but Stiglitz has simply ignored the other…the political…side of the coin.

Control of global politics from Washington does not fit with democratic decisionmaking in the financial realm. A political foreign policy based on the determination to control global oil supplies does not fit with a financial foreign policy based on income redistribution to provide a safety net for the world’s poor. If the global economic system is to be transformed from short-sighted and selfish into long-range and focused on the common interest, then the global political system will also have to be similarly transformed. Needed change, whether replacing or just reforming the system, will require concomitant change of the rules of governance for the global political system as well.

Global Recession: No Clear Pattern in Unemployment Figures

U.S.
The U.S. unemployment rate continues an essentially linear rate of increase.

The number of people “working part time for economic reasons” (involuntary part-time workers) increased by 423,000.

Russia
A pessimistic report on Russia’s contracting economy and growing poverty was issued by the World Bank.

Japan
Although unemployment is only 4.4%, overall economic decline is anticipated to be worse during 2009 than in the West.

Brazil
Unemployment in Brazil is less than a year ago, albeit worse than in January.

Egypt
Unemployment in Egypt is less than a year ago, but higher than during the previous quarter.

Mexico
Unemployment in Mexico is 5.3% and rising rapidly.

Thinking Systematically about the G20 Statement

Follow-up to the classroom exercise in systems thinking to sharpen your analytical skills that was introduced yesterday. Including lots of discussion, this exercise would make an appropriate undergraduate lesson for two one-hour classes.

The G20 that just met to resolve the global financial crisis made a significant decision that fell short of the recommendations made by the Stiglitz report to the U.N. that was submitted in March. Although the U.N. commission headed by Stiglitz recommended restructuring the highly restricting rules used by international lending institutions so as to grant poor recipient countries the flexibility to implement desperately needed social welfare measures, the G20 instead focused simply on adding funding to the international lending institutions, thereby increasing the political power of the lending institutions rather than the recipient state governments.

How should we begin to think about the implications of this decision? Is it good news or bad news for everyone who is concerned about the state of the world’s economy? Following the method outlined in yesterday’s post, the apparent “reference mode” (mental model; initial point of view) of the G20 underlying their decision is presented.

(Note: for the purposes of this post, I assume goodwill and sincerity on the part of the G20; i.e., I assume here that the G20 truly desired to resolve the economic crisis to the benefit of all mankind. Of course, if you make a different assumption, e.g., that the G20 was out to exploit the world for the benefit of the rich countries, then the reference mode I have drawn would not represent the G20’s point of view. Normally, in using this methodology, you draw the reference mode honestly to represent what you personally believe before you start analyzing the problem of interest to you. Here, instead, I am guessing—based on the logic of the G20’s statement—what the real intent of that body was.)

The G20 Reference Mode says that:

  1. The key variable impacting the well-being of the world’s poor is the amount of aid;
  2. The amount of aid and the well-being of the poor covary.

QUESTION: is the G20’s presumed perspective correct?

Consider the following initial causal loop diagram as an approach to analyzing the accuracy of the G20 perspective. I am suggesting that this causal loop diagram captures the key issue: does a rise in World Bank & IMF funding under current rules help or harm the well-being of the world’s poor? The argument can be made that increased aid under current rules results in the impoverishment of local populations even as, e.g., extractive industries designed to export resources cheaply to the West flourish. The purpose of this post is not to answer that question but simply to structure an analytical approach that could profitably be used, say, in a classroom, systematically to illuminate this problem.

Feel free to create a completely different explanation of the core behavior of socio-economics in poor states receiving World Bank/IMF aid if you wish. Alternatively, if you wish to accept this causal loop diagram, first, think about its implications and then consider how it might be improved.

Implications of the causal loop diagram as it stands:

  • The black arrows represent the initial effect – the G20 evidently believes the effect is positive; do you agree? Will the rate of positive impact on social welfare be as rapid as positive impact on resource extraction? Will it remain positive? Will it be linear?
  • The green arrows represent a second stage effect. The G20 evidently believes this will, in both cases, also be positive. Do you agree? Specifically, does a successful extraction industry (consider oil from Iraq or Nigeria or Colombia; gas from Central Asia) equate to a general rise in social welfare?
  • The blue arrows represent feedbacks to international aid institution policies. What might the nature of such feedback be, assuming it exists?
  • The red arrow indicates a direct impact of the state of resource extraction industry on social welfare. The literature is vast; you may wish to start with Abdelrahman Munif’s novel about the arrival of Western oilmen to Saudi Arabia. What sign would you put on the red arrow (or do you think there is no impact at all)?

How it might be improved:

  • Add new variables?
  • Add intervening steps (e.g., along the red arrow)?
  • Add a feedback arrow from “popular living standards in poor countries” to “World Bank/IMF aid levels?

Please do not tell anyone, but here’s a secret: this post was not that difficult to write. It is about thinking systematically, which turns out to be easy once you get in the habit because, by definition, you do it one step at a time. This thinking process was so easy that, for example, a serious New York Times reporter reviewing the G20 statement would have had time to do it. In fact, this thinking process was so easy that even a G20 decisionmaker would have had time to do it. I wonder if any of them did.

Clouds of Financial Crisis: Imagining Silver Linings

While everyone is quite reasonably discussing all the bad things that might result from the darkening thundercloud of economic malaise, it is possible to imagine silver linings:

  • We might finance not old, tradition-bound, anti-environmentalist Detroit but new car companies that could transform the way America drives.
  • We might finance the development of world-leading green industries.
  • We might decide that being a good neighbor trumps global imperialism, not to mention being way cheaper.
  • We might decide that just a little redistribution is better than the widening social gap, that the emphasis of domestic policy should be on setting minimum standards of living, housing, and health care rather than maximizing GDP, no matter how grossly unfair its distribution.
  • We might decide that the mind-numbing debate between the two major, hide-bound, uncreative, self-centered parties about “regulation” vs. “no regulation” should be supplanted by an effort to determine what should be regulated (e.g., the use of others’ money) vs. what should not (e.g., venture capital).
  • We might decide that a rational combination of some wealth plus some security would better be achieved not by a blind push for endless globalization but by some thoughtful combination of some global businesses plus some local (e.g., make special rules to encourage the success of local banks protected from the high winds of global finance and with very conservative investment strategies).
  • We might decide that wealthy and powerful corporations have a responsibility for the impact of their actions (e.g., before banks can foreclose, they should take action to ensure that the families put out on the street get some help in finding and paying for a modest apartment, perhaps with the bank sharing the rental cost; e.g., the principals of Wall Street firms that are found to have concealed their investment strategies from government regulators in order to get away with risky behavior should be required to pay back all personal benefits received on the job and then fired).

We might decide there is a better way to run a country.